About 25 percent of mortgage applications in the United States were denied in 2010, according to the Federal Reserve. If a bank has turned down your request for a mortgage, it's likely that there is a reason, even if you don't think it's a good one. Banks make money off the interest on loaned money, so it is in a bank's interest to provide a mortgage to the most-qualified candidates. Banks turn down mortgages for a variety of reasons, including poor credit, a history of foreclosures, too many unsold units in a condominium building and low appraisals.
Your credit report is an indicator of whether you will be a low-risk borrower or a borrower likely to default on loans. Maintaining a low debt-to-income ratio and paying your bills on time is important if you want to get a mortgage. Prior to getting a mortgage, you should pull your credit report from all three credit bureaus: Experian, Equifax and Trans Union. You can obtain a free annual credit report from all three bureaus by going to www.AnnualCreditReport.com, the only credit report website recommended by the Federal Trade Commission. Look through your credit report for any errors or omissions and have them corrected by contacting the credit bureau.
If you lost a prior property to foreclosure, your credit score likely took a major hit. Even if you build your credit back up, you'll likely be turned down for most mortgages. Fannie Mae and Freddie Mac are two important government-sponsored organizations that guarantee bank-issued mortgages, but they do not back mortgages loaned to anyone who has had a house foreclosed on in the past seven years. Issuing a mortgage that is not backed by Fannie Mae and Freddie Mac is viewed as risky by banks, so it can be difficult to obtain financing after losing a home to foreclosure.
Excessive Unsold Units
If you are attempting to purchase a unit in a condominium building, you may be surprised that your application for a mortgage was denied despite the fact that you have excellent credit, no or low debt, cash reserves and sufficient income. If less than 70 percent of the units in the condo building have sold, lenders will be reluctant to issue mortgages because those mortgages will not be backed by Fannie Mae. Fannie Mae regulations require that 70 percent of the units in a newly constructed or converted condominium be sold before they will back loans issued by lenders for units in the building.
Lenders will sometimes turn down a mortgage if they believe the value of the property is lower than the amount you want to borrow. Appraisals can vary wildly depending on who is doing the appraising, available comparable data for the area, and the number of foreclosures and short sales in the area. One lender's estimate of a property's value can differ drastically from another lender, so find a different lender and get another appraisal if the first was too low.
Figuring Out Why a Mortgage Was Denied
Banks are required to provide you with a letter explaining why they have denied your request for a mortgage within 30 days of your application. Consider whether you should remedy the documented issue, such as low credit or a debt to income ratio that is too high, before requesting another mortgage. Paying your bills on time can improve your credit score and paying down debt will lower your debt to income ratio. You can always ask the lender for a second opinion, or attempt to obtain a mortgage from another lender.
- Federal Reserve: The Mortgage Market in 2010
- The Mortgage Professor: Credit Reports and Credit Scores
- Federal Trade Commission: Facts for Consumers
- NuWire Investor: New Fannie Mae Condo Regulations Could Stifle Condo Demand
- Bank Rate: How to Avoid a Low Home Appraisal
- Loan Safe: Turned Down for a Mortgage
Based in Chicago, Annie Wang has been writing since 2008. Her work has appeared in World Architecture News and other online publications. She holds Bachelor of Arts degrees in English and art history from the University of California, Davis.